Economics · Chapter 8
Study notes aligned to the official NEB syllabus.
International trade is the exchange of goods and services between different countries. It arises because countries differ in their natural resources, climate, skill, capital and technology, so that each country can produce some goods more cheaply than others. By specialising in what it produces best and exchanging with others, every country can raise its standard of living. This chapter explains the difference between internal and international trade, the balance of trade and balance of payments, the exchange rate, free trade and protection, and the theory of comparative cost.
Internal or domestic trade takes place within the boundaries of a country, using a single currency, a single set of laws and free mobility of goods and factors. International trade takes place across national boundaries and differs from internal trade in several ways. It involves different currencies, so the exchange rate matters. Factors of production such as labour and capital are far less mobile between countries than within a country. There are trade barriers such as tariffs and quotas, different languages, laws and commercial policies, and greater distance and transport cost. These differences are why international trade is studied as a separate branch of economics.
The balance of trade (BOT) is the difference between the value of a country's visible exports and the value of its visible imports of goods during a year. It records only visible or physical goods. If exports of goods exceed imports the balance of trade is favourable or surplus, and if imports exceed exports it is unfavourable or deficit.
The balance of payments (BOP) is a systematic record of all economic transactions, both visible and invisible, between the residents of a country and the rest of the world during a year. It is wider than the balance of trade because it includes not only goods but also services such as tourism and banking, transfers such as remittances and grants, and capital movements such as loans and investment. The balance of payments has a current account and a capital account, and in the accounting sense it always balances, though a country may have a deficit or surplus on its current account. For Nepal, remittance inflows are a major item that supports the balance of payments.